Feud puts spotlight on Hong Kong's family-run corporates

Sun Hung Kai Properties boardroom showdown set for Tuesday

HONG KONG (MarketWatch) -- Family fighting in Hong Kong's corporate world takes the spotlight for investors here this week.

An emergency board meeting set for Tuesday of Sun Hung Kai Properties (16), the city-state's largest developer by market cap is the latest installment in the escalating feud between the three Kwok brother scions.

The saga has gripped the usually staid Hong Kong corporate world and been front page news as eldest brother Walter and group chairman fights an attempt by his two siblings to oust him from the board. Last week. Water issued a writ accusing his brothers of defamation after they'd released a list of his 17 "wrongdoings," including claims he was mentally unstable or bipolar. The three brothers rarely crack a smile at the best of times despite the enormous profitability of SHKP, but these developments have shocked Hong Kong.

And as Chinese culture elevates maintaining face or mianzi in public as such a crucial part of relationships, you can get a sense this could get uglier still. Shareholders, meanwhile have watched the share price drop 10% in recent months since the troubles first came to light. Now that the dispute is hitting the courts, a protracted legal battle looms, potentially impacting the group's workings.

Worst case would be a Chinachem-like scandal, where for decades the family of the large but private developer feuded in Hong Kong's courts. As conventional Chinese wisdom goes, wealth never survives three generations. It's best to watch this one closely.

This case is unusual but is unlikely to be the last. Various family controlled companies in Hong Kong built up since the 1970's will see succession policy come under the spotlight as founding shareholders reach an age where retirement or the golf course looks a better prospect that the boardroom.

But rather than bad blood, this could also lead to new blood coming in, and some potentially interesting opportunities.

For instance, in the past week speculation has intensified that 100 year-old Run Run Shaw may be finally selling his 75% stake in Shaw Bros that has a controlling 25% stake in Hong Kong's dominant terrestrial broadcaster TVB. A lot of big-name private equity firms are said to be interested, but it may well be a China tycoon who wins the day. Shaw Brothers has a huge library of Cantonese films and productions that could have great potential if marketed to the wider Chinese-speaking diaspora.

Looking at succession is particularly interesting if you consider the biggest family-run corporate in town -- Hutchison Whampoa (13) -- although next to Run Run, founder Li Ka-shing is still a sprightly 79. Market watchers who know the family predict at some stage his empire's assets could be divided up amongst his two sons. Bets are Victor will focus on the property and infrastructure assets, while Richard is likely to be more interested in the telecom businesses if he returned. Richard opted to work outside the family empire and is the controlling shareholder of PCCW Ltd (8), although it's believed he still has part share in the family trust that owns flagship Cheung Kong Holdings (1).

Richard notably tried unsuccessfully to divest himself of his controlling stake in PCCW last year, a move that could make returning to the family fold easier.

The challenge will be for these dynastic changes to proceed while still meeting the proper transparency and corporate governance standards that institutional shareholders expect.

Investors need to be sure to keep one eye on boardroom dynamics and not just focus on the earnings numbers.

This comes at a time when controversy has been bubbling under about the Hong Kong Stock Exchange and the maintenance of listing standards. It's a big advantage being on China's doorstep, but international exchanges as well as China's resurgent local markets are increasingly giving it a run for its money.

The local bourse's deep liquidity and resilience to setbacks means investors often turn a blind eye to questionable corporate governance practices, although the shells of burnt out penny stocks that litter the exchange are a reminder things could be better. That legislator and tycoon banker David Li last year settled an insider trading scandal by paying the U.S. Securities and Exchange Commission $8 million, raised further questions about the clubby culture of Hong Kong's corporate elite.

This also comes at a time when controversy of the direction of the Hong Kong exchange came to a head, resulting in investor rights activist David Webb http://webb-site.com/ resigning as a director this month. He complained of eroding standards at the bourse and succumbing to political influence.

For investors in SHKP, board members squabbling in front pages of newspapers is likely to be an added equity risk not worth taking. And in increasingly fleet footed world of international listing boards, the Hong Kong exchange will have to be seen to be offering a competitive, modern and transparent market.

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